Fixers

by Michael M. Thomas

  Mankoff views the carnage serenely. Neither he nor (he tells me) Gerrett is sweating STST’s current price. By next spring, he’s certain, once the new administration’s in power and pump-priming with all its might (and the taxpayers’ full faith and credit) and the market sees the kind of money STST is making, the shares will be back well over $100 and probably closer to $150. Let us note that everything he’s predicted so far has come to pass.

  NOVEMBER 21, 2008

  This has been a hell of a day. Break out the champagne. Orteig has kept his end of our bargain. The president-elect’s transition team has put the word out that the incoming administration’s economic team will be headed by Harley Winters in the White House and Thomas Holloway at Treasury.

  When I heard the good news late this morning, I was a few blocks west of my office conferring with an important new client who’d been sent my way by a friend at Julliard, a hedge-fund guy named Leonard King, who looks like a complete thug, with a shaved skull and a mug that belongs on post-office walls, but who turns out to be an opera fanatic. He gets more of a thrill from what’s in the bars and staves of a Mozart score than in the cells and columns of an Excel spreadsheet. You remember my idea for a series of operas based on Shakespeare? Well, my new client has bought into it, and we’re in the early discussion stages for a series of new productions to be performed around the world: Macbeth, Otello, and Falstaff, by Verdi; Roméo et Juliette, by Gounod; and The Tempest, by contemporary composer Thomas Adès. This is a huge, costly undertaking that I’ve been thinking through for some time (it’ll cost around $200 million), but its prospective underwriter is a man who earned $1.3 billion last year and whose net worth Forbes put at $11 billion. He has what Wall Street types call “three-comma money.”

  We were humming along, matching lists of singers’ and conductors’ availabilities and fees, when all of a sudden he got a call that he said he had to take and rushed out of the office. When he returned, he was lit up like a Christmas tree with positive energy, and when he told me the good news about the appointments, I felt like I was having an out-of-body experience.

  “You know what this means, don’t you?” he told me. “Half the Street’s been thinking this new guy’s going to do a Pecora rerun and put a bunch of people in the slammer, but with Winters and Holloway calling the shots, that’s not going to happen. Both of them are on record as opposing criminal prosecutions. So it’s hallelujah time! The Dow and the S&P are already through the roof, because you don’t have to be a genius to know what this means. We could have a thousand-point spike in the Dow over the next few days.” Then he sent me on my way, declaring that he and his troops had “to hit the mattresses.”

  On the way back to the office, I stopped off at a hamburger joint on Lexington Avenue I like, and while I was eating, finished reading this morning’s Times. Today’s op-ed section has a long piece by Marina Hochster, the take-no-prisoners financial reporter who’s a major thorn in Lucia’s side. There are few journalists that Lucia can’t bring around to seeing things the STST way—but this Hochster woman is one of them.

  To my surprise, the piece was very hopeful and conciliatory, almost prayerful, not at all in the saber-tongued, slash-and-burn, antagonistic style Hochster’s famous for, which makes her a favored talk-show guest. She’s publicly stated that she models her journalism on the famous muckrakers of Teddy Roosevelt’s time—Ida Tarbell, Lincoln Steffens, and Frank Norris—and ours: Woodward and Bernstein, Matt Taibbi, and Seymour Hersh. I read somewhere that Hochster hopes in her career to do to the pinstriped crooks on Wall Street what Hersh did to the perpetrators of My Lai.

  Well, I thought as I read that, lots of luck, dear lady. Muckraking’s not what it used to be. Back in TR’s day, the journalists had the support of TR and his bully pulpit. And right up through Watergate, public indignation could be ignited and rallied. But nowadays, not so much—if at all. People are inured to scandal in high places—you can thank the Clintons for that—and have the Internet on which to vent their indignation individually. Who needs to join a rally when you have Twitter? Even Hersh gave up trying to rake the corporate muck a long time ago. He once said in an interview that while journalists may relish the thought of going after Big Money, editors and publishers don’t.

  Reading Hochster’s piece made me feel kind of sorry for her. The column was all about how OG’s election a couple of weeks ago will usher in a bright new era, in which justice and brotherhood will prevail and the bad guys will be made to pay for their malefactions. I’d give anything to see her face when she hears the Winters-Holloway news. You don’t have to be a cynic, or to know what I do, to grasp that this just isn’t going to happen, not the way the nation is run today.

  You have to admire Orteig’s timing; he’s sprung the trap at just the right moment, with the nation still drunk on expectation and giddy with idealism, and in no frame of mind to sit back, look hard, and ask, “What the hell is this about?” The way I think I would, were I not in on the game.

  The effect on the markets was just what my client said it would be. By lunchtime, a giant, shimmering spiky shudder of speculative relief had swept Wall Street. The Street works by the theory that disaster deferred is disaster eliminated. Gone were all fears of retribution from a Democratic administration. By the time the last weary trader shut down his Bloomberg terminals, the Dow was up nearly 500 points, and the smart money is looking for another 500 come Monday.

  The financial stocks lagged the rally, STST among them. It opened at $47 and change, closed at $53. Still a one-day bump of over 10 percent isn’t to be sneezed at. I reckon it will take time for investors and traders to process the true potential for Wall Street of the appointment of two committed laissez-faire, pro-finance, anti-regulation types to manage a so-called “liberal” administration’s economic and financial policy. Under OG, the Great Bush Giveaway, as Scaramouche calls the TARP bailout, will continue to roll on like the mighty ocean, splendid and implacable and teeming with sharks.

  Anyhow, it’s fair to say that my day passed in a kind of egotistical euphoria, tempered by mild disappointment that there’s nobody out there whom I can tell about the coup I’ve masterminded. Just as I was getting ready to leave the office, Lucia called and we talked briefly about Winters-Holloway and what it meant. Her Washington connections report that some of OG’s inner circle—including, curiously, his wife—are unhappy because they were never really given a chance to participate in the decision.

  It was at the end of the day as I made my way downtown to meet a friend for a drink, brimming with pride and self-congratulation, that I recalled the famous passage from The Great Gatsby in which a shady type is pointed out to the narrator as “the man who fixed the World’s Series back in 1919.” I wonder if someday people will point me out as “the man who fixed the 2008 presidential election.”

  Will I be pleased? Only time will tell.

  NOVEMBER 27, 2008

  OG’s transition team has now formally confirmed the leak that drove the market up 1,000-plus points in five days. Harley Winters and Thomas Holloway will head the new administration’s economics team, Winters as chief economic counselor to the White House, Holloway as Secretary of the Treasury. No mention of Brewer and scant mention of Vollmer. I imagine that Winters has already seen to it that the former Fed chief is marginalized.

  When I spoke to Orteig this afternoon to wish him a happy Thanksgiving, he told me that the president-elect already seems to be developing a man-crush on Holloway. That doesn’t surprise me. They’re both technocrats with exceptional skills in career advancement. As for Winters, OG totally buys into the He Who Knows Everything image. He’s one himself.

  From what I hear, the Street’s celebrating Thanksgiving with caviar and noble vintages. As well it should. Regulatory Armageddon has been postponed, if perhaps canceled. Hedge fund managers can shred their Cayman Islands visa applications.

  Last Monday, following Friday’s 500-point spike, the market opened up big and stayed up big, with
the Dow gaining another 400 points. STST closed at $67. By the time I landed Wednesday at Montego Bay (I’m staying with friends in a villa with a beautiful, unobstructed view of Ralph Lauren), STST had broken back up through $70, a recovery of over 40 percent in just three sessions; it closed at around $76.

  Of course, a decent interval will be required—a new president inaugurated, the Winters-Holloway nominations confirmed by Congress—before the Street can get back to business as usual. I had coffee with Mankoff the day before I left for Jamaica and he’s very bullish. It couldn’t have worked out better for STST: greatly reduced competition, risible cost of capital, zero transparency, and the prospect of an extra $20 billion to play with, thanks to my GIG prestidigitation. Mankoff thinks the second half of 2009 may be STST’s best and biggest ever.

  One amusing note. Just before I turned in, I caught an MSNBC rerun of an interview with Marina Hochster. She’s a nice-looking, strong-featured woman, with a marked New England accent. The type people call “handsome.” She wouldn’t look out of place on a Nantucket widow’s walk, scanning the far horizon for her menfolk’s whaler. She was asked about the Winters-Holloway appointments, and responded, “It’s like appointing a couple of Ku Klux Klansmen to run the NAACP.” I thought that was pretty good?

  Ah, well, so go the politics of this great corrupted republic. Bring on the turkey and the ackee and jerk sausage stuffing. In other words: Happy Thanksgiving and God bless us, every one!

  NOVEMBER 29, 2008

  It’s generally agreed that Mankoff runs one of the tightest ships plowing the mighty seas of global finance. Its balance sheet reflects plausible valuations; the firm takes generous haircuts on illiquid or unmarketable securities and recognizes losses promptly. Relatively speaking, they’re as clean and honest as you’ll find on the Street. They’re in no regulatory difficulties as far as anyone knows: no inside trading, exposure to the Foreign Corrupt Practices Act or RICO, money-laundering, sanctions-busting. In other words, STST isn’t HSBC.

  Nevertheless, the financial crisis is so all-enveloping that not even the most risk-averse firms can avoid taking a few hits. Beginning last March with the fall of Bear Stearns, STST began to take write-downs and reserves against its trading book. These have been worsened by a severe falloff in business since Lehman. According to Lucia, Mankoff advised his board that the firm could show a loss for 2008 of almost $1 billion.

  Now it appears that won’t happen. The numbers sorcerers have ridden to the rescue.

  You remember Groundhog Day? Where Bill Murray wakes up every morning to find that it’s always yesterday? This is sort of the scheme STST’s smartest numbers jugglers and its most ethically flexible senior accountants have concocted. It’s a scheme that to my untutored and ethically naïve eye makes Enron’s accounting look like IBM’s, but apparently I’m being naïve again, because it’s perfectly legal. On Wall Street, never forget, legality is the sole animating principle of morality.

  Here’s how it’s going to work. For as long as anyone can recall, STST has been on a “November fiscal year.” Each November 30 they close the books on the twelve months past and the next morning, December 1, they open a fresh set of ledgers for the upcoming twelve months. For fiscal 2009, however, STST is switching to a “December year,” one that will begin on January 1, 2009. The switch will take place after the books are closed on the (present) November 30, 2008, fiscal year. Which leaves the entire month of December 2008 in limbo or, if you prefer, purgatory.

  So what will become of the missing month?

  It seems that December will just vanish. That’s right. It will be effaced from the face of time with a few clicks of an auditor’s mouse. Those souls who calibrate their working lives to STST’s calendar will go to bed this Sunday and won’t wake up, from an accounting perspective, for thirty-one days, until January 1, 2009. Talk about Rip van Winkle!

  The missing thirty-one days will have their earthly uses, be sure of that. They’ll constitute a sort of arithmetical septic tank, into which will be dumped what’s left in the way of loss-making junk on STST’s balance sheet. Write-offs and markdowns that have been postponed will now be taken. December’s shaping up as a lousy month for business, anyway, so this way they’ll kill two birds with one pass at the abacus. And here’s the best part: December 2008 will only have to be shown in next year’s annual report as a footnote. Isn’t it amazing what an accounting firm can do with only a pencil and a set of spreadsheets?

  You’ll also be pleased to learn that STST just got a very nice check for $19 billion from the Federal Reserve that closes out the GIG swaps problem. Some of this windfall will be paid out to make certain most favored counterparties whole, but Lucia says about $4 billion will stick to STST’s ribs. According to her, the Bush Treasury insists that no disclosure be made by Washington until next year after the inauguration, when it’ll be the new team’s problem. Seems fair to me.

  DECEMBER 17, 2008

  Last night Lucia attended Rosenweis’s annual Christmas party. I had an important client to entertain and couldn’t go, so she called this morning to report.

  Among the big shots assembled around the table, the consensus was that Bernanke’s going to take the discount rate straight to zero, a course of policy that, “in terms of benefit to Wall Street,” will be like “waking up to find Jennifer Lopez sucking your dick,” as Rosenweis colorfully put it.

  At the end of the evening, Rosenweis asked Lucia to stay for a nightcap. No way he’ll get into her pants, or even come close, and they both know it, so this postprandial chat was all business. Apparently, Rosenweis thinks Wall Street is getting a bum rap. Here’s Lucia’s recollection of what he said: “You need to do a better job next year. We all do. I know people are angry. But hey, we just did what Uncle Sam told us to do. No one told us to stop: not in 2004 or in 2006 and 2007, and even in 2008 until the bottom fell out. We’re not the people who are supposed to be looking out for the taxpayer. That’s the government’s job. We need to get that message out.”

  I will refrain from editorial comment.

  DECEMBER 18, 2008

  In times like these, that try men’s souls, small rays of sunshine give outsized warmth to the troubled spirit.

  Orteig called me at home tonight to give me a heads-up to pass along. It seems that Barney Frank, the Massachusetts congressman whose potential to be a pain in the butt is exceeded only by his talent for hypocrisy, has teamed up with Senator Chris Dodd, a man who (according to Lucia) has never seen a payoff he didn’t like, to write some law—now universally known as “Dodd-Frank”—that will require a certain percentage of future TARP disbursements to be used for mortgage forgiveness.

  Normally Dodd-Frank wouldn’t be something Winters and Holloway would be in a position to head off. Technically they’re powerless with respect to legislation until after the inauguration next month, but Orteig reports that Winters has persuaded OG that the mortgage crisis is a policy matter that now belongs to the new administration and must therefore not be allowed to move ahead legislatively without the president-elect’s agreement. OG has bought that argument, and word has been conveyed to Rep. Frank that if he expects as much as a single jeep to be budgeted for military installations in his district, he better table any legislative initiative until after the inauguration. Dodd is less of a problem; with him it’s just a question of how big the check needs to be.

  Every day, it seems, there’s new news that paints the mortgage industry as a hotbed not only of reckless lending but also of outright fraud. Apparently Citi has an operation in deepest Missouri in which thousands of worker bees at computers spend their day “kosherizing” bad or defective mortgages. Loans in which the come-on was fraudulent, the terms misrepresented along with the borrowers’ financial position, the paperwork incomplete and therefore not legally binding. These weren’t loans created to put America’s little people in homes of their own, mind you. These were loans created to generate fees and spreads for Wall Street. Less than 15 percent of subprim
e mortgages written during the past few years were for first homes; the rest went for flips, second homes, and home equity.

  It makes one wonder how many lanterns Diogenes would have gone through searching the dimly lit corridors and corners of Washington for an honest man—but I keep telling myself to stop thinking like this. Become more tough-minded, more the practical man of affairs for whom the bottom line is all. After all, Mankoff says there’s work still to be done, which will doubtless call for yours truly to affect a clear eye and a hard heart.

  DECEMBER 23, 2008

  Nobody can wait for the midnight clear, that’s for sure. Wall Street still resembles Humpty Dumpty: patched up along the fault lines but the cracks still very evident. Here’s hoping Uncle Sam’s fiscal Super Glue holds. Apparently Citi has had to have major additional transfusions of the taxpayers’ money to bail out its “Structured Investment Vehicles,” or SIVs. These are the “let’s pretend” off-balance sheet entities Citi and its lawyers created to stick the big bank’s worst garbage in. I’m told there was a highest-brass meeting with their accountants and lawyers during which they were told either to fix the SIV problem and bail out certain internal hedge funds—including the fund they bought for $900 million from the slick Indian gent who’s now running the bank—or risk a big fat qualification on their audit. Word is that this may result in Citi having to bring as much as $100 billion of toxicity back onto their balance sheet.